Thursday, May 07, 2009

Prosperity and the President

What is it about 3rd world nations that keeps them so poor? What is it about the wealthier countries that makes them wealth? Groups like the CATO institute have bee studying this question and found that prosperous countries have two attributes: rule of law and strong property rights. It turns out that people are only willing to invest their life's savings if they know that the results will not be seized arbitrarily or by corrupt officials.

This is important to the current economy. President Obama and the democratic Congress are a weak defenders of these two principles. Obama has talked about taxing the richest 5% of the population. Congress came close so seizing bonus money after it had been paid. With Chrysler, Obama dictated terms. The hedge funds, which by law could demand that 100% of their investment be paid back before the union pension funds got anything, agreed to lose 40% of their investment but balked at losing 60% when the pension funds got a better rate. For this, Obama denounced them as speculators who were only interested in profit. Banks that have accepted TARP funds have found themselves saddled with ever-changing restrictions on bonuses, salary, and even where they can hold conventions. Obama plans to have the government take over all student programs, pushing out the private institutions that currently provide half the loans.

All of this is having an effect. According to Forbes, investors are not investing.

Investors, other than the banks who desperately needed TARP funds for survival, are leery of any program that uses them. Anyone who took TARP funds has been subject to government interference in managerial decisions. The restrictions on bonuses and executive pay have been widely discussed in the media. Less well known are restrictions on the banks' ability to hire foreigners, and the constant harassment by Congress over internal management decisions on everything from the use of private aircraft to the locations of conferences. Some of these concerns are well justified, of course, but it wasn't clear ex-ante what all of the rules were and it isn't clear ex-post either.


Why would private capital get involved when the rules of the game are so capricious? No one would take that gamble when it is clear that, in dealing with the government, private capital will always take a back seat to politically powerful entities.

And that is the larger worry that current policy has neglected. Firms and markets can function quite well within a framework of rules. Indeed, rules are good for the orderly conduct of business. But when rules get imposed or dispensed with willy-nilly in the interests of politics, it is very dangerous. We have should have learned this lesson long ago.

The Obama administration's record on the rule of law isn't that good either. A law professor appointed to the top legal spot in the State Department thinks that international law (i.e. European law) takes precedence over the Constitution. The Supreme Court has used foreign precedent in determining domestic cases.

Obama has indicated that he wants his nominee for the Supreme Court to have "empathy". His qualifications are:

We need somebody who's got the heart, the empathy, to recognize what it's like to be a young teenage mom. The empathy to understand what it's like to be poor, or African-American, or gay, or disabled, or old. And that's the criteria by which I'm going to be selecting my judges
BTW, the nominee also has to be a woman.

The implication here is that Obama wants a justice who values bending the law to help specific groups of people over being fair and impartial. A strange requirement from a former constitutional law teacher but he has said the same thing more than once.

While none of this is going to turn us into a 3rd world country, it is going to slow investment and that is going to hurt everyone. The quickest way out of the recession is to expand the economy. That is why both the Obama and Bush administrations have gone to lengths to free up credit. But this will not accomplish anything if people are afraid to invest.

Ironically, the economic crisis went a long way to assuring Obama's election but his anti-business attitude makes him a poor person to be in the White House during an economic downturn. His administration gives constant mixed messages and his base in the Net-Roots accuses him of having sold out to Wall Street.

Until Obama realizes that he has to help investors instead of punishing them we will have a slow recovery. Since his promise to halve the deficit is based on a strong recovery, this will eventually come back to hurt him in several ways.

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